The craft brew industry bounced back in 2021, with 8% growth over the unavoidably abysmal pandemic year of 2020. That sounds good, but only if you conveniently ignore 2019 (pre-pandemic) trend lines. The bounce-back was real, and gains were strong for taprooms, brewpubs, and microbreweries, but the landscape has changed. Even without the ongoing pandemic reverberations, longer-term demographic and behavioral shifts mean breweries face opportunities, hurdles, and growing new challenges (and challengers).
The biggest picture snapshot doesn’t tell us much: half of breweries responding to Watson’s survey are at or above their 2019 numbers, and half are at or below. So, it takes some economist-level digging into the numbers to start seeing actionable trends.
“Like the proverbial pint half full or empty, you can look at what happened in the past year and have very different views depending on your size, business model, geography, and more,” Bart Watson, Chief Economist for the Brewers’ Association, said today in his annual State of the Industry Address at the 2022 Craft Brew Conference. “Obviously, our top line number of 8% is a very positive growth number, but it's cycling a minus 10% given the huge channel shifts we saw in COVID away from draft, away from at-the-brewery sales, and so what we're seeing is a rebound as much as true growth.”
Some good news comes from a big-picture view of craft volume, and craft dollar share over time. The recent dip and rebound are driven by the channel shift away from in-person in 2020, which bounced back robustly in 2021 with dollar shares rising to an all-time high. A lot of this is driven by increased growth in retail, with people returning to on-premises retail settings.
“We're continuing to see more share for taprooms and brew pubs who tend to have higher retail value, as well as be selling more of their beer on premise, which was a higher retail markup,” Watson said.
Beer ceding territory to competitors
But this growth is largely illusory, according to Watson, due to evidence of an overall growth problem in the industry. While craft beer grew in 2021, and in fact, that growth of shipments up 1% was the strongest for beer in a decade. That rises to 2% when including other segments that are taxed as beer, such as fermented malt beverages (FMBs) and hard seltzers (fermented seltzer beverages, FSBs).
But if 1% growth is your best in a decade, then the industry has growth challenges. And those numbers look worse when looking at just traditional beer, and removing those taxed as beer, like FSBs and FMBs. The answer for the largest brewing companies in the country has increasingly been to call themselves “beverage companies” rather than “beer brewers.” They’ve pivoted into products that they see growing: the former competition of wine, hard liquor, and RTDs.
|Read about Bart Watson's State of the Industry from last year, Sept. 2021, to compare and see what sentiment has changed.|
“To me, this invites a question: “what does craft want to be?” Watson asks. “And I'll start by saying, I'm never going to tell an entrepreneur what they should do with their business. That's your choice. Some brewers are clearly going to move into these other beverage products, moving into the fourth category and trying to grow like the large brewers into wine, hard liquor, or other beverages. Others are going to try to stay in beer. I think we're reaching a call-to-action moment for those who really want to grow the beer category.”
Consider the big picture of beverage alcohol share, comparing overall beer (not just craft) to overall hard liquor. A few decades ago, beer had nearly a 30 point share lead on hard liquor. Fast forward to today and that lead has largely eroded. And if these trends continue, beer is not going to be the number one beverage in the United States going forward.
Craft brewers might want to shrug this off as not their problem – they’ve grown over that period while what Watson calls the “leaky bucket” of macrobreweries’ yellow lagers and light beers have been trending down.
“But as this trend continues over time, it tips the playing field more and more away from here and toward other categories,” Watson said. “There are only so many consumer dollars, distributor trucks, and retail shelves. And as we've seen in the past, craft has been a beneficiary of this. Growth categories often get more favorable regulatory and tax treatment as they grow.”
Bars and restaurants fully rebound, but draft lags
While on premise beer sales certainly rebounded in 2021 when compared to 2020, they're still well below where they were in 2019. Even in the back half of the year, after many people were vaccinated and closure mandates and restrictions waned to nearly fully opened, on premise draft beer numbers level off at around 15 to 20% less than 2019 levels. When including the full year data, they’re down almost That's despite the fact that bar and restaurant sales overall have returned to their former trend.
“We're going back to bars and restaurants as we did before, but we're buying less draft beer. That's a problem,” Watson warns. “Rebuilding this channel is going to be critical for craft brewers. Craft brewers have a 30% share in this channel, and this is going to be something those individual brewers are going to need to do account by account, keg by keg, and bring back that innovation, quality, and variety that is more crafted recent years.”
Categories and their respective bounce back
Craft brew categories are subdivided by venue into taprooms, brew pubs, microbreweries, and mid-sized regional breweries.
As stands to reason, the craft brew venues with the biggest 2021 bounce-back were taprooms (+21%) and brew pubs (+19%). Those two categories are most dependent on foot traffic and butts in bar stools, so naturally they experienced the most growth in 2021. Watson cautioned that these numbers were the national averages, but there was a whole lot of local variation, region by region. For instance, as the number of taprooms continues to grow, certain regions might be reaching carrying capacity.
“We've been growing the pie of at-the-brewery sales in recent years, but we've also been growing the number of slices,” Watson said. “And at some point, we have to question whether that pie can grow as fast as the slices. This is really a local market question.”
Brew pubs, on the other hand, didn’t grow in number as much as taprooms, so their per-location growth slightly outpaces that of taprooms.
Where packaging is concerned, microbreweries (+12%) and regional breweries (+5%) are of particular interest. They do the most when it comes to volumes of packaged beer going toward retail in cans or bottles. Since they’re far less reliant on the on-premises business, they neither dipped as much in 2020, nor needed to rebound as much in 2021.
“Microbreweries are one place where I think we're really seeing a strong demand growth still. People want local,” Watson said. “In the last couple of years, they increasingly of want packaged beer. These are the types of things that microbreweries are uniquely positioned to capitalize on. At the same time, the supply chain challenges in the past year, not to mention retail and distributor consolidation, have showed us that scale matters.”
Consideration of scale brings us to the larger regional brewers. As the least dependent on the on-premise business, and most dependent on packaged beer, these needed the least rebound. They also have the greatest existing infrastructure for packaging beer. But the smaller end of the regional brewer category is where the most growth is, matching and keeping pace with the even smaller microbreweries.
One positive sign is that the distribution of growth among regional breweries is category wide. 76% of regionals in our data grew in 2021 and zooming in on the smallest regionals—those between 15,000 and 30,000 barrels—that number rises to about 80% of those breweries showing growth.
“That's another interesting point,” Watson said. “With similar challenges to many microbreweries and those breweries grew at the exact same rate, 12% as microbreweries, those smaller regionals between 15 and 30, the medium brewer in that range is about 10 years old now. And I think it's an interesting question to see what those businesses do going forward.”
The cohort of smaller regional breweries who are growing in sophistication (and likely, packaging capability and infrastructure) should be an interesting target market for packaging OEMs and materials suppliers, too. They are aging and growing past their existing equipment in terms of volume and speed. Maybe, but not so fast said Watson.
“In the past they would've been primed for expansion, which brings advantages of scale and growth,” he said. “But at the same time, the past decade has showed us the challenges, the costs, and the risks of expanding geographically and in size. It'll be interesting to see if these regional categories choose to make that leap to the next size or choose to stay where they are.”
Craft brewery count demonstrates the classic ‘S’ curve
In a classic example of a maturing market approaching saturation, the total brewery count is still growing, but the pace of growth is slowing. That's something that's typical of industries that get rapid innovation and growth, followed by a more mature phase.
“One thing I'd say about that and add to that is that mature phase doesn't mean the end to growth, but what it does mean is that industries are going to need to find innovation, new models to break out of that pattern that we're starting to see emerge of fewer and fewer breweries growing over here,” Watson said.
As an industry, there are still more openings than there are closings. But the trend over time, looking at 2018 to 2021, shows fewer new openings every year. A lot of this curve flattening is driven by fewer openings, not more closings.
“There are going to be brewery openings every year going forward, but I think we're going to see a lower, more realistic number in an industry that is maturing, where borrowing costs are rising, and where, frankly, there's probably greater enthusiasm in other parts of beverage and beverage alcohol right now,” Watson said.
Notably, there were fewer than 200 closings for the entire calendar year of 2021. That seems extremely low, considering there were 86 closings in just the month of March 2020. Watson credits this to the craft brew industry’s high use and adoption of Restaurant Revitalization Fund, which the Brewers Association’s Federal Affairs team was able to facilitate for its members. These government funds have been a lifeline to breweries savvy enough to seek them out and benefit. But this lifeline of support may be drying up soon.
“If that's the case, we're going to find out how many wounded breweries there are and how many are ready to stand on their own without government support in the months going forward,” Watson said. “2022 is going to be a make-or-break year for a lot of small businesses. If we do see that number of closings rise in the coming months and years, I want to underline for the hundredth time, this isn't a bubble being burst. Nothing I see in the numbers suggests the demand for craft beer is waning. What I think we're starting to see is we're reaching a phase where demand, the segment, as a whole, does not guarantee demand for individual businesses.”
Demographics show a maturing market and maturing consumer
New openings are declining, but there aren’t many closings, either. That means that the average age of craft breweries themselves is getting older.
“On the one hand, this brings positives and advantages, like more wisdom, more maturity, and more market experience. But it also brings challenges,” Watson said. “Craft isn't the new kid on the block anymore, and there are lots of entrants in beverage and beverage alcohol, lots of niches that are looking for our market share. We're going to have to see breweries think about that, reinvent themselves, do things to stay relevant. Most breweries or brew pubs and tap rooms, they're hospitality businesses, and anyone who follows those industries knows you have to reinvent, refresh in order to stay relevant over time.”
|Read about the challenges that surround demographics and the generational shift from Boomers to Gen X, to Millenials to Gen Z, from PMMI's Executive Leadership Conference.|
Craft brew consumers are also maturing, right alongside their favorite breweries. In 2030, the census bureau projects there will be as many legal drinking age gen Z-ers as there will be baby boomers, and there's going to be 15 million more millennials than either of those generations, and the millennials will be turning 50 in 2030. Watson said we will see a very different marketplace than the one we see today.
“In the last 10 years, the average age of craft drinker has gone up 1.5 years. That may not seem like a lot, but if we continue to see that trend over time, we're going to continue to see craft demographic age. And pretty soon the beer that you are making is someone's parents or grandparents’ beer, which isn't a problem. We want everyone's parents and grandparents to be drinking craft, but that needs to be a conscious choice as opposed to something that just happens because we're not staying aware of our demographics in our industry,” Watson said of the aging dynamic.
In this maturing market, there isn’t as much room for unfettered growth. Breweries will have to zoom in on specific niches that they do really well. Simply hanging out a shingle as a local craft brewery won’t do it anymore.
Supply chain challenges
“Unfortunately, the last six months have really been a perfect storm in supply chain disruption,” Watson said. “And I see four [supply chain] dimensions right now where we're getting hit in all directions.”
The first is demand, and the behavioral changes resulting from COVID-19. We experienced a channel shift where consumers stopped going to bars and restaurants, started buying more cans, and now the supply chain is reacting with can availability and price issues. Logistics are another matter, with workforce issues damaging key industries like trucking, and increased costs pretty much everywhere. Finally, a double whammy of climate change and war in breadbasket countries like Russia and Ukraine make the basic ingredients of beer harder to get ahold of, and pricier. This is especially true to craft brewers who lack the scale and supply chain muscle of their big beer contemporaries.
Supply chain challenges create a pricing dilemma for craft brewers, and there really are no great choices. If you don't raise price with all the supply chain increases, you see your margins are eroded. This isn't an appetizing idea after a couple of years where lot of you have had a lot of financial hardship. If you do raise price, you risk raising price more than maybe your customers will follow, thus losing volume.
Overall, the beer industry has begin raising prices, by 5% over the four weeks in fact. But Watson said craft brewers have been slower than any of their beer peers in passing along costs to customers.
“Overall, to me, this should be a gut check moment for many breweries and brands. If you're not raising price, why? The simple answer is probably you fear that you will lose volume. If you go up with price, your distributor maybe won't push you as much, customers will buy you on retail shelves, or maybe you're chasing the volume and you think others will go up in price and that's your market strategy,” Watson said. “But I would challenge everyone to think about what it would take to get your brewery's brands to a point where you would be confident raising price and not losing volume. That's the kind of affinity everyone should have with their brands and their customers.”
Fourth category challengers and reasons for optimism
Beverage alcohol has long consisted of three categories: beer, wine, and spirits. But a new contender is disrupting the old framework, and beer seems to be ceding the most territory in terms of market share.
Seltzers and RTD hard alcohol cocktails aren’t beer, but in many consumers’ eyes, they look a lot like beer. They’re in cans or other similar packaging formats, they have similar alcohol volumes, and the price points are similar.
“This is a category that many breweries are going to see opportunities in. Individually, you may see places that you want to grow, but collectively is a challenge for beer,” Watson said. “Again, there are only so many consumer dollars, so many distributor trucks, and so many retail shelves. And these are the types of products that haven't been in the cold box before, and they are eagerly eyeing that space. That growth will only continue if these products are able to affect regulatory and legislative change to gain greater market access.”
The big players in the space, like the White Claws and Trulys of the world, are backed by big beverage muscle, and are attempting to change rules in a more favorable direction for RTD liquor in either taxes, distribution, or both.
Watson concludes that despite this spate of challenges, there are beacons of hope out there and reasons for optimism. Breweries that are able to adapt and change to changing palates of a changing consumer demographic have clear paths forward. He cites the evolution of IPAs form the IBU wars of the past into the newer, hazier, juicier, fruitier IPAs of the current landscape.
“But IPA, or really any style, is not going to be enough to grow craft going forward,” Watson said. “We're going to need to find more niches, more places to grow, because with 9,100 brewers maturing [at different rates in] a fractured market, we're going to need to find new customers, new preferences, and new places. The same growth that got us here is not going to be the growth that gets us out of that maturing market and finds the next increase in our market share.” PW